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Serial disruptions threaten global economic growth

24 May 2022 Sara Johnson

Russia's invasion of Ukraine, a wave of COVID-19 infections and lockdowns in mainland China, relentless inflation, and tightening financial conditions have disrupted production and stifled demand, causing the global economy to stall. Led by services, growth is expected to return at a moderate 2.5% annual pace in the final two quarters of 2022, with the lifting of COVID-19 restrictions in most regions. After a 5.8% rebound in 2021, global real GDP will likely increase 2.9% in 2022 and 3.1% in 2023. This forecast is revised down by 0.3 percentage point in 2022 and 0.2 percentage point in 2023, largely reflecting weaker growth prospects in mainland China and the United States. While the global economic expansion is expected to continue at a diminished pace, new geopolitical, financial, or supply-side shocks could tip the world economy into recession.

While global price inflation is peaking, its retreat may prove painfully slow.

Global consumer price inflation picked up from 5.3% year on year (y/y) in December 2021 to an estimated 7.0% this May, a pace that will likely be maintained through September. Unwinding the cost pressures that have built up over the past two years will take some time. Yet, rising interest rates, slower economic growth, and improving supply conditions will bring some price relief. After reaching a record high in early March, the IHS Markit Materials Price Index has fallen 14% through mid-May, led by declines in prices of metals, energy, chemicals, and lumber. A deceleration in consumer goods prices will follow, although resilience in services demand could delay the easing in services price inflation. Global consumer price inflation is projected to rise from an average of 3.9% in 2021 to 6.7% in 2022 before moderating to 3.7% in 2023 and 2.7% in 2024.

High inflation and rising interest rates have dimmed the US economic outlook.

The Federal Reserve raised its policy rate by 50 basis points at its May meeting and signaled more forcefully its determination to subdue inflation. The federal funds rate will likely rise to a range of 3.00-3.25% in mid-2023. In anticipation of further policy tightening, Treasury term yields have risen sharply, as have spreads to corporate bond yields and mortgage rates. The dollar has appreciated while the S&P 500 index of stock prices has fallen 20% year to date. Although household finances are generally in good shape, high inflation is eroding real incomes and making households more cautious about spending the savings they accumulated during the pandemic. The boom in housing markets is subsiding, and by year's end, business will start reining in capital spending increases. Real GDP growth is projected to slow from 5.7% in 2021 to 2.4% in both 2022 and 2023—down from our April forecast of 3.0% in 2022 and 2.8% in 2023. With real GDP growth running below potential, the unemployment rate will rise from 3.6% in April to 5.0% by 2025.

Soaring energy costs could tip Western Europe into recession.

Our May forecast already incorporates a mild quarter-on-quarter contraction in eurozone real GDP in the second quarter and declines in UK real GDP over the final three quarters of 2022. Eurozone retail sales, industrial production, and net foreign trade decreased in March, as the fallout of the Russia-Ukraine war took a heavy toll on consumer and business confidence. On the positive side, the S&P Global PMI™ surveys showed robust growth in the service sector in April following the removal of pandemic containment measures. Our forecast remains below the market consensus, with eurozone real GDP growth projected to slow from 5.4% in 2021 to 2.5% in 2022 and 1.8% in 2023. The prospect of a further disruption to energy supply, which drives up prices, is a downside risk as the European Union considers broadening the ban on energy imports from Russia to include oil and petroleum products.

COVID-19 restrictions have dealt a major setback to mainland China's economy.

After 4.8% y/y growth in real GDP in the first quarter, economic performance turned dismal in April. Industrial production and service-sector output shifted from expansion to contraction as lockdowns curbed consumer spending. Retail sales fell 11.1% y/y in April, while residential floor space sold plummeted 42% y/y. The lockdowns—centered in Shanghai—also disrupted port activity, causing a slowdown in previously robust export growth. While new cases of COVID-19 appear to be declining and industrial activity is resuming, the government's dynamic zero-COVID policy will remain in place through 2022, preventing a return to normalcy and limiting the effectiveness of new fiscal and monetary stimulus measures. Thus, real GDP growth will likely slow from 8.1% in 2021 to 4.3% in 2022, with real consumer spending growth slackening from 5.9% in 2021 to just 2.2% in 2022. The slowdown in mainland China will have modest spillover effects among its regional trading partners. Real GDP growth in Asia Pacific excluding China and Japan is expected to ease from 5.4% in 2021 to 4.7% in 2022 and 4.5% in 2023.

The Russia-Ukraine war will have lasting impacts on Emerging Europe and the world.

Russia's invasion of Ukraine on 24 February has fundamentally changed the geopolitical landscape. Our forecast assumes that Russia will likely continue its military attacks in the months ahead, encountering strong Ukrainian resistance. The outcome could be a lengthy geopolitical impasse. In response to sanctions and the withdrawal of foreign investments, Russia's real GDP is projected to fall 10.2% in 2022 and 1.4% in 2023 before beginning a languid recovery. After a 46% collapse in 2022, Ukraine's real GDP will likely rebound 30% in 2023 and 14% in 2024 as reconstruction proceeds, supported by substantial aid from Western allies.

Posted 24 May 2022 by Sara Johnson, Executive Director – Economic Research, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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